Terror at Ten Feet
Nick Gillespie | April 16, 2008, 8:58am
Whenever I see the corporate logo of Northwest Airlines (NWA), I always think of a band that came straight outta Compton all those many years ago.
Anyhoo, NWA and Delta are in merger talks to become the world's biggest, and certainly worst in terms of service and pricing, airline (as it is, they both suck pretty hard right now). The pilots at both joints are lukewarm-to-cold on the deal and various congress critters have spoken out against the deal. Neither will be able to put the kibosh on things, though they can make the eventual outcome more difficult and costly.
A snippet from one article:
"It's not an industry that works," said Mark Cooper, director of research for the Consumer Federation of America, who lobbied Congress against a bid by US Airways for Delta last year.
"We're now getting to the point where there are so few carriers left, and they still can't make money," he said yesterday.
Delta and Northwest said they have no current plans to cut more U.S. flights beyond what they have disclosed separately -- something analysts see as limiting the cost savings or higher fares the airlines could reap from the deal. The carriers also don't plan to close any of their hubs. But they didn't rule out further capacity cuts in the future if fuel prices continue to rise....
The executives said they would like to close the deal by the end of this year, which would be before the merger-friendly Bush administration leaves office.
Several lawmakers already have railed against a Northwest-Delta combination, arguing that the deal will decrease competition and lead to higher fares. But Congress has little power to stop a transaction, and most experts believe the Justice Department will approve it.
I like mergers and I don't fear bigger companies that result from them, even if mergers typically fail when it comes most measures of success. Airline deregulation in terms of pricing of tickets has been an absolutely great thing, though it was never extended to airports and air traffic control, which creates all sorts of problems. The troubles with the airline industry are due to a lack of free markets (including the prohibition on foreign ownership of "domestic" carriers), not their presence. Bailed out after the 9/11 attacks, expect the ailing airline industry to keep going back for more at the government teat on a regular basis. The airline industry is one of the worst when it comes to pushing "free markets" when it benefits them, then crying for government protection/intervention when that will help them out.
Tell your tales of Shatnerian "Nightmares at 20,000 Feet"—or, much more likely, on the tarmac or in the terminal—here.
And go Braniff!
Update: Skip Oliva notes via email, "The other problem that you did not state is that antitrust regulation prohibits most temporary alliances—aka "cartels"—that might make more economic sense than outright mergers.
Dave W. | April 16, 2008, 11:23am | #
To answer your incomprehension, why don't you tell me how a merger harms consumers from the consumer's perspective?
Well, the most obvious part answer is pricing power. The more consolidated the supply side is relative to the demand side, then the more pricing power the supply side collectively has, and money-wise, the suppliers win and the customers lose. This part is so obvious it does not even bear discussion.
Let's move on to some of the more subtle (and perhaps more important) stuf.
There is more than one way to design a plane.
There is more than one way to do pricing.
There is more than one way to do screening.
There is more than one way to do customer service.
There is more than one way to do baggage handling.
there is more than one way to determine routes.
Etc, etc, etc.
The best way to optimize these variables, and the inevitable tradeoffs that must be made between them is trial and error. Even after there is enough data to optimize, there may be no single best approach (that is, set of tradeoffs) and a mixed strategy may be appropriate.
Having less competition decreases the amount and vigor of this trial and error process. It is pretty easy to see why it decreases the number of trials. More difficult to perceive is the loss in vigor. For example, even if two (and only two) companies did (for some reason) offer a service smordgasbord, the smorgasbord will tend to be less crative and varied than if the service options arose of 200 or 2,000 separate companies.
To bring it home in the present context: I would love to see an airline say
"we do less security because that is less hassles -- we dare the terrorists to try to bring one of our birds down despite the de-emphasis of security measures -- less security = less hassles" I would fly them. I bet you would, too. However, you are not going to see that happening as long as airlines are managed by oligopoly thinking as they are now.
Federal Government | April 16, 2008, 5:39pm | #
All right,
I've got 15 minutes and I see Dave W has posted a response, so let's get to work:
It's time to teach Dave W about the implications of his FDR Libertarianism
I asked Dave about how the merger would negatively effect of trying to buy a ticket from X to Y. I will now fisk his response:
Well, the most obvious part answer is pricing power. The more consolidated the supply side is relative to the demand side, then the more pricing power the supply side collectively has, and money-wise, the suppliers win and the customers lose. This part is so obvious it does not even bear discussion.
Very good Dave! It seems we have something to work with. You are quite correct that a consumer will have fewer choices and will have to pay a higher price. However, please note: the airlines are losing money. This means, that the market clearing price to fill the airlines' seats is below the cost of flying people. So, we have a glut.
Now, if you run a business indefinitely at a loss, you are in effect destroying wealth, which is very bad. So somehow the price has to rise until the trips are profitable for the supplier again. The suppliers have several choices:
1) To come up with ingenuous ways of doing business that reduce their costs.
2) Reduce the capacity until the market clearing price rises to a level that is profitable again.
3) Liquidate their business.
Now option 1 is pretty hard what with all the regulations that govern how airlines do business. The only way to do it is by merging with another airline and eliminating duplicate facilities/expenses.
Option 2 on the other hand can be done offering reduced service, or by merging with another airline and reducing duplicate capacity.
Teh consumers who really need to fly will still get tickets at a price they are willing to pay. The guys who only are somewhat willing to fly signaled by their unwillingness to buy anything other than a discount ticket will be less capable of flying. Yes. However, the airline owners are not the slaves of this latter class of customer.
Let's move on to some of the more subtle (and perhaps more important) stuff.
There is more than one way to design a plane.
There is more than one way to do pricing.
There is more than one way to do screening.
There is more than one way to do customer service.
There is more than one way to do baggage handling.
there is more than one way to determine routes.
Etc, etc, etc.
The best way to optimize these variables, and the inevitable tradeoffs that must be made between them is trial and error. Even after there is enough data to optimize, there may be no single best approach (that is, set of tradeoffs) and a mixed strategy may be appropriate.
Dave, Dave, Dave.
These have nothing to do with customer service
If airline X is not driven to come up with a new baggage handling scheme my competitive pressure, consumers aren't harmed! Why? Because a consumerbuys a ticket only if he thinks the trip is going to be worth the cost of the ticket!
It's none of our business how efficiently the airlines do their business! The more efficient guys will charge lower prices and put the less efficient guys out of business. And, and this is important. In an industry with large capital equipment costs, when the less agile competitors are going under, their assets will be purchased by a profitable competitor in a merger.
Get it? A merger is the free market in action where valuable assets belonging to someone who is doomed to go out of business.
Having less competition decreases the amount and vigor of this trial and error process. It is pretty easy to see why it decreases the number of trials. More difficult to perceive is the loss in vigor. For example, even if two (and only two) companies did (for some reason) offer a service smordgasbord, the smorgasbord will tend to be less crative and varied than if the service options arose of 200 or 2,000 separate companies.
To bring it home in the present context: I would love to see an airline say "we do less security because that is less hassles -- we dare the terrorists to try to bring one of our birds down despite the de-emphasis of security measures -- less security = less hassles" I would fly them. I bet you would, too. However, you are not going to see that happening as long as airlines are managed by oligopoly thinking as they are now.
OK, and here is where we get to the meat of the matter. When the merged airline lays off staff, and closes facilities, what happens to those assets Dave?
Do the laid off workers just starve off by the side of the road? Or do they go into other professions? Do they sit on welfare or do they get other jobs?
In reality they go into other industries, where the consumer demand justifies their labor! In other words they go from where they are not needed, the airline industry, to where they are needed, albeit possibly in a lower paying job flipping burgers.
Your mistake is a classic case of what Bastiat would call "ignoring that which is not seen".
All of these criticisms you level about reduced vigor and the like ignore the fact that by sucking people out of more profitable ventures and keeping them in an unprofitable industry, the anti-merger folks are actually making things worse off!
Even by your standards of maximizing some social utility, trying to prevent mergers actually makes everyone, on the aggregate worse off.
In effect, you are confusing capacity with economic health. This is the same mistake old FDR made; he too focused on preventing the required contraction in certain politically important industries. The end result was not prosperity but a Depression that lasted until those policies were finally abandoned by his successor. That's why I call your economic ideas FDR Libertarianism.
OK time's up. I must once again hit the road. It's been fun.
